Understanding the Health Care

Business Model: The Financial

Analysts’ Point of View
Per Nikolaj Bukh and Christian Nielsen

This study focuses on how financial analysts understand the strategy of a health care company and
which elements, from such a strategy perspective, they perceive as constituting the cornerstone of a
health care company’s business model. The empirical part of this study is based on semi-structured
interviews with analysts following a large health care company listed on the Copenhagen Stock
Exchange. The authors analyse how the financial analysts view strategy and value creation within the
framework of a business model. Further, the authors analyze whether the characteristics emerging from a
comprehensive literature review are reflected in the financial analysts’ perceptions of which information
is decision-relevant and important to communicate to the financial markets. Among the conclusions of
the study is the importance of distinguishing between the health care companies’ business model and
the model by which the payment of revenues are allocated between end users and reimbursing organi-
zations. Key Words: strategy, business models, disclosure, financial analysts, revenue streams.

F
or the health care sector in general,
the customer base is growing stead-
ily. In developed countries the demo-
graphic changes will in the coming decades
increase the percentage of elderly consider-
ably, because of the post-World War II baby
boom as well as the fact that our lifespan
also is increasing. In the developing coun-
tries, e.g., the so-called BRIC countries
(Brazil, Russia, India, and China), higher
living standards will give rise to the crea-
tion of large health care sectors. However,
this does not imply that health care compa-
nies will be greeting times of unwarranted
prosperity.
As globalization creates greater demands
for health care services, globalization too
will create greater competition for health
care companies. Therefore, explaining and
communicating uniqueness, profitability, and
strategy, i.e., the business model, will play a
vital role in attracting capital. This article
thus studies the constituents of a health care
company’s business model through the eyes
of the analysts following it.
The capital market plays an important role
in our present day society as it facilitates
the distribution of capital between inves-
tors and companies. Within the realm of the
capital market, information plays a central
role because of, for example, agency costs1
and the fact that there is information asym-
metry2 between company management and
Per Nikolaj Bukh, PhD, Professor, Department of
Business Studies, Aalborg University, Denmark. He
can be reached at pnb@pnbukh.com.
Christian Nielsen, PhD, Associate Professor, Depart-
ment of Business Studies, Aalborg University, Den-
mark. He can be reached at chn@business.aau.dk.
Acknowledgments: This study reports results from the
project “Reporting on the Business Model: Under-
standings from the Management and Analyst Point
of View.” The financial support from the “KPMG
and the University of Illinois Business Measurement
Research Program” is gratefully acknowledged. We
will especially express our thanks to Torben Steen
Nielsen, Jens Steen Larsen, and Carsten Lønfeldt, all
from Coloplast, for their cooperation in the research
project from the very beginning, and to the finan-
cial analysts who have participated in the research
project.
J Health Care Finance 2011;37(2):8–26
© 2010 Aspen Publishers

8
 Understanding the Health Care Business Model
investors. Recent research in relation to
IPOs in the health care industry3 suggests
that new companies entering the market rep-
resent great peril to the investment commu-
nity because a mere financial analysis of the
company is insufficient to understand future
profitability in this sector.
By means of the annual report, Web pages,
investor meetings, conference calls, as well
as private meetings, publicly listed health
care companies provide information to the
capital market, i.e., investors and financial
analysts, in order to minimize such informa-
tion asymmetry. In principle, the disclosure
of additional relevant non-financial informa-
tion, for example, relating to the pipeline and
relevant partnerships across the pharmaceu-
tical industry, is expected to lower the cost
of equity capital4 because increased disclo-
sure reduces information asymmetry and
lowers investor uncertainty about the future
prospects of the company, thus facilitating a
more precise valuation of the company, as
discussed by Botosan.5 It is, however, not
sufficient that credible, reliable, and neu-
tral information is conveyed to the capital
market. The information should also be rel-
evant in relation to assessing aspects of the
company’s current and future performance,
and, more importantly, the investors and
analysts should be able to comprehend this
information.
Most literature concerning supplementary
reporting models6 and voluntary disclosure
in general7 suggests that information on the
strategy of the company, in the form of key
value drivers, should form the basis for dis-
closure of information and therefore also for
the dialogue with financial analysts. From a
strategy perspective, such a reporting model
or framework for disclosure is offered by the
concept of a business model and Lev8 has
9
previously argued that the existing problem
of lacking transparency in corporate report-
ing can be overcome by basing disclosure
on the company’s business model. Business
models have earlier been intimately con-
nected with e-business;9 however, the con-
cept as such has a much broader meaning in
recent management literature.
The aim of this study is to identify which
elements a health care business model could
consist of in order to form the basis for the
communication between management and
financial analysts. Previous literature on
business models has mostly been based on
theoretically anchored models of, for exam-
ple, value creation—relationships between
resources or growth drivers where one or
sometimes a few companies have been used
as cases or illustrations of the models. This
article, however, does not attempt to verify
the usefulness of a specific perspective on
business models. Rather, we take financial
analysts’ understandings of strategy and
strategy related elements as a starting point,
and then analyse the business model of a
health care company, in turn identifying the
elements that financial analysts mobilise
when they understand, analyse, describe,
and rationalise strategy.
Thus, the main contribution of this study
is the identification of the elements that con-
stitute financial analysts’ concrete under-
standing of the health care business model
since a more general formulation of a busi-
ness model should comprehend building
blocks that can facilitate the communication
of these elements.
The empirical part of this article is based
on interviews with 12 financial analysts from
European investment banks about the busi-
ness model of a large health care company
listed on the Copenhagen Stock Exchange.
10 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
Our focus when conducting the interviews
was on identifying the general elements that
constitute a business model from the ana-
lysts’ point of view. In this article the inter-
views are analyzed using a coding approach
where codes determined from a compre-
hensive survey of the literature on business
models are taken as a starting point.
The remainder of this article is structured
as follows: After an introduction to the infor-
mation needs of analysts, we introduce the
concept of a business model. Then we review
the literature on business models focusing on
the identification of specific characteristics,
followed by an introduction of the research
methodology and the interview data, and the
empirical analysis of the health care case-
company structured around the business
model characteristics, respectively. Finally,
we offer conclusions on the study and fur-
ther avenues of research.
Analysts’ Information Needs
Both from the perspective of the finan-
cial markets and accounting organizations, a
growing frustration with traditional financial
reporting has been evident in the last two dec-
ades. Such frustrations have been expressed
in the ‘Jenkins Report,’10 the work of the
former commissioner of the Securities and
Exchange Commission (SEC), Steven Wall-
man11 and, more recently by the Accounting
Standard Board12 and The Canadian Institute
of Chartered Accountants.13
Various studies of investors’ and analysts’
information demands14 indicate a substan-
tial difference between the types of infor-
mation found in companies’ annual reports
and the types of information demanded by
the capital market.15 This information gap
is partly due to an increased demand for
non-financial information, i.e., concerning
the company’s strategy and competencies,
and its ability to motivate the staff, increase
customer satisfaction, etc. However, this
information gap may also be due to a lack
of understanding of business models and
of proper communication between com-
pany management and the capital market.16
In this respect, Nilsson et al.17 suggest that
the main objective of applying a business
model approach is to bridge the commu-
nication gap between management and
external stakeholders, as shared models
become a platform for creating common
understanding.
From the financial analysts’ point of
view, information disclosed in the annual
report or in a supplementary report only
constitutes one part, maybe even an infe-
rior part, of the information set needed to
make recommendations to clients. This is
because financial analysts are in a privi-
leged position to “get more information—
and sooner—than all [other information
users] except the very largest investors.”18
Thus it might be the case that information
provided in the annual report has value
relevance, but the analysts have already a
much more detailed understanding about,
for example, the research and development
activities than what could be gained from
reading about the aggregated research and
development expenses.
The Business Model as Basis
for Corporate Communication
Changes in the nature of value creation
have inevitably called for new reporting
metrics and frameworks. Blair and Wall-
man19 argue for instance that a model for
business reporting reflects the dynamics of
wealth creation. Business reporting should
 Understanding the Health Care Business Model
essentially constitute a representation of the
company’s business model
by describing the relationships among
the various input measures and out-
come measures, and to link the pri-
mary inputs to intermediate inputs
and, ultimately, to financial perform-
ance and other measures of total value
creation.20
Competition now increasingly stands
between competing business concepts as
Hamel21 argues and not only between con-
stellations of companies linked together in
linear value chains, as was the underlying
notion in the original strategy framework by
Porter.22 If companies within the same indus-
try operate on the basis of different business
models, different competencies and knowl-
edge resources are utilized in the value crea-
tion processes, and the mere benchmarking
of financial or non-financial indicators will
not provide insight in the profit or growth
potential of the company. Comparisons of
the specific company with its peer group
require interpretation within an understand-
ing of differences in business models.
The business model concept has intimate
connections to corporate disclosure and the
ongoing debate about transparency. Since
forward-looking information can be dif-
ficult to comprehend if it is not mobilized
within the relevant context, supplemen-
tary disclosures must be linked to value
creation.23
There exists a substantial amount of litera-
ture on business models. However, there is no
generally accepted definition of what a busi-
ness model is and the theoretical grounding
of most business model definitions is rather
fragile. Nielsen24 offers a definition along the
lines of:
11
A company’s business model describes
its collaborative portfolio of strategy
choices put in place for the handling
of the processes and relationships that
drive value creation on operational,
tactical and executive levels.
Furthermore, business model definitions
vary significantly as they are derived from
a number of different perspectives. In this
study we are interested in how business
models can form the basis for communi-
cation between management and financial
analysts.
Thus, we perceive the business model as
a management technology that helps man-
agement communicate and share its under-
standing of the business logic to external
stakeholders,25 in our case primarily analysts
and investors. The notion here is that man-
agement must explain the company’s unique
value proposition to external parties, as
Sandberg26 states: “Spell out how your busi-
ness is different from all the others.” Finally,
the mere process of modelling the business
helps management in identifying and under-
standing the relevant elements of its busi-
ness,27 such as, for example, value drivers
and other causal relationships.
Characteristics of the Business Model
It is not possible to cover all literature
on business models within the scope of this
article, but in this section we review those
parts of the literature that we have found rep-
resentative or most relevant in developing a
business model framework useful in corpo-
rate communication.
We have as shown in Figure 1 chosen to
structure our review around nine topics that
are typically discussed in the literature on
12 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
Figure 1. Overview of Business Model Characteristics
1. Criteria for Long-Term Performance
2. Points of Departure for Creating
Products and Services
3. Interconnections That Drive Value
business models. These areas, which are
termed ‘characteristics of business models’
are in this article grouped in three overall
categories covering the areas that are most
often included as part of a business model:
• The overall criteria that determine long-
term performance;
• The point(s) of departure for creating
products and services; and
• The key interconnections that drive the
value generation of the company.
Criteria for Long-Term Performance
While the ultimate goal from an extreme
shareholder perspective could be said
to increase the stock price by creating
profit, business models sometimes address
broader criteria such as sustainable devel-
opment, which implies that focus is shifted
from mere profit orientation towards sus-
tainable enterprises and an economic real-
ity that connects industry, society, and the
environment.28 This need for linking sus-
tainable development to business strategy
is for instance acknowledged by Funk,29
who characterizes the sustainable organi-
zation as “one whose characteristics and
• Sustainable development
• Strategy
• Improving the business and innovation
• Resource base
• Value chain
• Value proposition
• Value drivers
• Value creation
• Causal relationships
actions are designed to lead to a ‘desirable
future state’ for all stakeholders,” and by
Afuah and Tucci30 who argue that the busi-
ness model concerns sustainable develop-
ment through the company’s unique value
configuration.
In using the notion of a business model
as our key concept in this study we have
implicitly assumed that it comprehends
something more than strategy or at least
is a concept different from strategy. In this
sense Magretta31 is clear when she states that
“business models describe, as a system, how
the pieces of a business fit together. But they
don’t factor in one critical dimension: com-
petition,” which implies that she finds com-
panies’ competitive basis to be completely
outside the business model.
Another perspective is offered by Czuchry
and Yasin32 who argue that a business model
is not necessarily successful by itself because
companies must integrate and align strategic
and operational efforts, activities, resources,
and decisions into a systematic organiza-
tional strategy, thus indicating that strategy
is an integrated component of a business
model. Departing from this discussion,
Chesbrough and Rosenbloom33 argue that
 Understanding the Health Care Business Model
while business models are more oriented
towards value creation and sustainable devel-
opment from a bounded rationality perspec-
tive, strategy theory is more apt to consider
value creation from a shareholder perspec-
tive, and suppose full analytical rationality
of decision-makers.
Finally, business models have also been
associated with company’s efforts to improve
the business and innovate. Much early lit-
erature34 departed in how new technology,
most notably the Internet, revolutionized
certain industries and changed the feasibil-
ity of existing business models. This was
for instance illustrated by Gallaugher35 who
showed how e-commerce enabled the emer-
gence of new business models.
Also from an innovation perspective Kart-
seva et al.36 suggest the business model as a
basis for strategic analysis since it offers the
possibility for mapping new business ideas
graphically in a clear and communicable
fashion. In this way business models facili-
tate change because of their building-block-
like approach to formulating the business
logic of a company.
Points of Departure for Creating
Products and Services
In this section we take a closer look at how
business models describe elements of the
organization that are a part of the company’s
performance. Performance-related elements
are elements that relate to the actual struc-
ture of the company. We distinguish among
three characteristics:
1. Resource base;
2. Value chain; and
3. Value proposition.
The company’s resource base is impor-
tant, as there has been a lot of focus on which
13
resources actually drive company value crea-
tion. For example, in the knowledge society
it is stated that primarily knowledge drives
value creation. Along these lines, Miller
et al.37 argue that capabilities are the back-
bone of a company’s competitive advantage
because resources are a more stable element
on which to base sustainable development
than competitive strategy in a highly vola-
tile business environment. Klaila38 explains
how the business model helps to identify the
critical behaviours, competencies, and mar-
ket conditions and account for the compa-
ny’s resources of intellectual capital. From
the resource-based perspective we must per-
ceive resources in the sense of being assets39
and inputs to the value creation process of
the company. As it is difficult for organiza-
tions to understand the role of knowledge
resources in their value creation,40 the busi-
ness model approach becomes advantageous
by visualizing the company’s capability con-
figurations, which are the cohesive combina-
tion of resources and capabilities embedded
within its infrastructure, and which generate
value.41
Porter defines the value chain as a basic
tool for analyzing the sources of competi-
tive advantage of the company, by enabling
systematic examination of all the activities
a company performs and how these activi-
ties interact.42 Every company is essentially
a collection of interdependent activities that
are performed to create value. The value
chain can also be perceived as, according to
Shank and Govindarajan,43 a generic concept
for organizing our thinking about strategic
positioning. They define the value chain as
“the linked set of value-creating activities all
the way from basic raw materials to the ulti-
mate end-use product delivered into the final
consumers’ hands.”44 Within the notions of
14 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
business models, the value chain comprises
the company’s activities and organization45
and the structure of the company.46 In Bell
et al.’s47 framework, core business proc-
esses and activities, and the analysis hereof,
are viewed in the light of a value chain
perspective. Likewise, Chesbrough and
Rosenbloom48 imply that the value chain
perspective leads to identification of the
activities and assets (inputs) that are neces-
sary to deliver the company’s value proposi-
tion (outputs).
However, there exist other value configu-
ration models than the value chain. Stabell
and Fjeldstad49 suggest that the value chain
is but one of three generic value configura-
tion models. Stabell and Fjeldstad50 distin-
guish between three generic value configu-
ration models:
1. The value chain;
2. The value shop; and
3. The value network.
They argue that such a distinction is
required in order to create an understand-
ing and ultimately facilitate the analysis of
company-level value creation across a broad
range of industries and companies. Accord-
ing to Giertz,51 each type of business is based
on this kind of unique value creation logic.
Understanding and managing companies,
he argues, thus requires a simulation that
will test the business model and its strategy.
Sweet52 argues for the necessity of under-
standing how the business model and its
value creating elements work, as a prereq-
uisite for managing the company. Ramirez53
too, offers an alternative view to that associ-
ated with value creation in industrial produc-
tion, arguing that technical breakthroughs
and social innovations in actual value crea-
tion render the alternative, a so-called value
co-production framework.
The value proposition or offering of the
company depicts which value it intends to
deliver to its customers. “A ‘business model’
is … a precise definition of who customers
are, and how the company intends to satisfy
their needs both today and tomorrow.”54
Morris’s definition, departing in the value of
the companies offering to the end users, is
very close to the definition of the knowledge
narrative from the Danish guideline for intel-
lectual capital statements. The knowledge
narrative “expresses the company’s ambition
to increase the value a user receives from a
company’s goods or services.”55 Chesbrough
and Rosenbloom56 similarly define the value
proposition as the value created for the user
of the company’s offering. According to
Webb and Gile,57 departing from the notion
of customer needs is the only true strategic
approach to take, thereby arguing against the
previous literature stating that the compa-
ny’s resources ought to be the starting point
for strategy formulation. For Hedman and
Kalling58 the company’s value proposition is
equivalent to the generic strategy of the com-
pany. In a likewise manner, Alt and Zimmer-
mann59 define the value proposition as a part
of the company’s mission statement together
with its vision and strategic goals.
Each type of business has its unique value
proposition logic60 as the value proposition
is closely linked to the products and services
delivered.
Interconnections That Drive Value
The final category of business model char-
acteristics concerns descriptions of internal
linkages in the company related to perform-
ance and creating value. By performance-
related linkages we mean elements such as
 Understanding the Health Care Business Model
value drivers, value creation processes, and
causality between, for example, activities,
resources, and processes.
These three categories regard the inter-
nal aspects of a company’s business model
because they all are concerned with how
value is created. Bray61 perceives value driv-
ers as the link between key performance
indicators and business objectives, at the
same time underlining that value drivers are
not outcome-oriented key performance indi-
cators; rather they are forward-oriented per-
formance measures. As value drivers imply
causal relationships, they are more clearly
visualized in a business model.
As Bray depicted above, key performance
indicators are linked to business objectives
via identification of the key drivers of value,
which in turn can be interpreted as key suc-
cess factors.62 Value drivers are not static
performance measures. Rather they will
vary over time, both within a business cycle
and from business cycle to business cycle.63
Eventually the company’s present value-
drivers will be replaced. This may be a result
of the company changing its strategy or busi-
ness model, which must have an effect on the
drivers involved in the value chain and value
creation process, or it could be an effect of
the changing external environment.
A business model is inevitably a represen-
tation of how the company creates value, and
value creation, therefore, is a cornerstone of
the business model concept. The external pre-
requisite, the value proposition, is a central
notion when referring to the internal prerequi-
site value creation, as the company’s offering
affects which value it must create and deliver
to its customers and the users of its products
or services. According to Linder and Can-
trell,64 “a real business model is the organiza-
tion’s core logic for creating value.” Alt and
15
Zimmermann65 also link the business model
to value creation, by stating that it describes
the logic that lies behind the actual processes
of a ‘business system’ for creating value.
The ability of establishing precise con-
nections and causal links and relationships
between knowledge resources, competences,
intellectual capital, etc., and the value
creation of an organization, has been in the
interest of the business and academic com-
munities for a long time. Via a business
model approach it is possible to identify
causal loops that depict linkages between
key performance measures and financial
results66 and that link combinations of assets
to value creation.67
Data and Research Methodology
In the empirical part of this article, we
examine the financial analyst’s way of think-
ing about strategy and business models in
terms of the techniques, methodologies, pro-
cedures, systems, presentations, frameworks,
etc., that are used when they articulate their
understandings of the strategy of a specific
Danish case company, Coloplast.
In addressing this issue a qualitative
research approach will be used. Financial
analysts that regularly analyze the company,
participate in corporate presentations, etc.,
and thus have a detailed knowledge about
the company, its strategy and the industry,
have been interviewed and the interviews
are analyzed where the nine characteristics
of the business model have been used as a
starting point for the analysis of the data.
The Case Company, Coloplast
The case company, Coloplast (www.
coloplast.com), founded in 1957, is a world-
wide provider of high quality and innovative
16 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
health care products and services, and is
represented in 30 countries. In the fiscal year
2006/07, its revenue amounted to approxi-
mately € 1.070 mill., and group profit before
tax was approximately € 80 mill. Coloplast
employs more than 7,000 people, 2,500 of
them working in Denmark, and the firm has
production facilities in six countries with
approximately 75 percent of Coloplast’s
products being produced in Denmark.
Coloplast’s vision is to be the preferred
source of medical devices and associated
services, contributing to a better quality of
life for the users of its products. Via close
customer relationships, Coloplast aims at
fulfilling the customer’s needs with innova-
tive, high-quality solutions. Further, Colo-
plast seeks to earn customer loyalty through
responsiveness and dependability.
With respect to communicating externally
about performance drivers, strategy, and
knowledge resources, Coloplast is rather
unique. Since 1998, Coloplast has published
a supplementary section on intellectual capi-
tal, shareholders, and other external stake-
holders as an integral part of its annual report.
In Denmark, Coloplast’s business reporting
is generally regarded as a best-practise case.
The company was for instance used as one
of the main cases in the first Danish guide-
line for intellectual capital reporting,68 and
was suggested by DiPiazza and Eccles69 as
the main example of disclosing information
on “how the company creates value.” Fur-
thermore, in October 2005, Coloplast won
the Danish Financial Analyst Associations
prize for best financial report for the second
time in three years.
The Interview Data
The data collection was based on semi-
structured interviews covering four themes,
each with a number of associated questions
according to an interview guide. If possible
the wording and the order of the questions
remained unchanged for all respondents;
however, the respondents were allowed to
talk freely and the questions were adjusted
according to that. The form of interviewing
chosen was based on the principle of dia-
logue between the interviewer and the
respondent70 and has some similarities with
the type of interview that Yin71 calls ‘focused
interviews.’
We interviewed all the sell-side analysts
that followed Coloplast on a regular basis.
The contact information of 12 analysts in
total was attained from Coloplast and the
analysts were contacted by the research-
ers after having received a letter of recom-
mendation from Coloplast’s Chief Financial
Officer. All analysts confirmed that they
performed regular analyses of Coloplast
including the dissemination of these through
analyst reports and all were willing to par-
ticipate in the research project.
Of the 12 analysts actively following
Coloplast eight were Scandinavian while
four were large European investment banks
located in Copenhagen, Stockholm, or Lon-
don. The typical analyst specialized in four to
six companies within the medico-technology
sector and sporadically followed four to six
major competing companies. However, there
were also analysts with a broader focus, and
some analysts were actively following up to
15 to 20 companies. All analysts were inter-
viewed in December 2003, a few weeks after
Coloplast’s annual earnings announcement.
Our focus when conducting the interviews
was on the general building blocks or ele-
ments that constitute a business model from
the analysts’ point of view. The interviews
were structured around four themes. First,
 Understanding the Health Care Business Model
we focused at the analyst’s background,
experience, and specialization. Next we
shifted focus to the company, Coloplast, ask-
ing broadly about how the analyst perceives
the company, its management, strategy,
value creation, and what critical information
they look for, etc. Thirdly, we asked about
the analysis process, i.e., what information
is used, how the information is used, how
the interaction with the company is, how the
information is structured during the analysis,
etc. As a continuation of the issues around
the process we ended the interview by ask-
ing about the annual report, how it was used,
how the different parts were perceived, etc.
The themes and questions were kept as
close to the daily routines of the analysts as
possible and we attempted to avoid refer-
ring to specific notions from the literature
on business models. As a structuring device,
we used an interview guide with a number
of pre-determined questions or sub-themes
for each interview theme. Not all questions
were necessarily brought up in every inter-
view, and as far as possible we let the ana-
lysts create their own structure during the
interviews.
Analysis
Taking the nine business model character-
istics identified earlier as a point of depar-
ture, see Figure 1, our analysis focuses on
how and why these are mobilized by the
respondents during the interviews.
The Overall Criteria for Performance
First of all, it is remarkable that the first
characteristic, sustainable development,
is not mentioned at all, while strategy was
referred to rather constantly. This is rather
interesting because the case company,
17
Coloplast, spends a lot of energy in its
financial report, on the Internet and in pres-
entations on communicating about how its
products relate to creating quality of life for
users and how the company works towards a
healthy environment in the local community
and for employees.
As previously described, strategy along
with competitive advantage actually rep-
resented the analysts’ overall approach to
understanding the business model. Strat-
egy concerned the mobilization of the core
elements of the organization. Through the
notions of strategy, the analysts described,
often in great detail, how Coloplast’s value
creation was constituted, also depicting
how these elements were adjusted to Colo-
plast’s value proposition, company values,
and vision. Strategy therefore relates to the
different elements of the business (model)
that are an integral part of the value creation
process, i.e., production, distribution, and
logistics, along with marketing aspects.
Strategy also relates to strategic manage-
ment processes, such as disclosure strategy
and the management of the financial posi-
tion, such as investment and disclosure
strategy. In this sense, the business model
to a great extent concerns core elements of
the company’s value creation process. It is
also intimately connected with competitive
strategy, as strategy becomes important in
relation to the key business model character-
istics of the company, i.e., how the company
mobilizes each core value creation (business
model) element in order to create competi-
tive advantage. If we differentiate between
corporate strategy and strategy on an opera-
tive level, it would be compelling to suggest
that the company’s overall strategy is its busi-
ness model and strategy on the more detailed
levels concerns the ways of effectuating it.
18 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
Efforts with respect to improving the busi-
ness are often mentioned as points within
the realm of ‘changes in strategy.’ Moving
production facilities overseas, increased
focus on cost reduction and efficiency, and
efforts with respect to maintaining quality
in production, thereby ensuring excellence
in products, are drawn forth meticulously
by the respondents. Improving the busi-
ness is also connected with innovation and
product improvement. In Coloplast’s case,
innovation is mentioned mainly in the sense
of product development. One analyst com-
mented that, “maintaining their high degree
of product innovation is a key driver of
growth [for Coloplast].” Thus, innovation
is connected to future performance from an
excellence perspective in the sense that mar-
ket growth is achieved through better than
average products.
Performance-Related Elements
The second category, performance-related
elements, relates to overall modules that
make up the company. For example, the
value proposition or offering of the company
relates to what the products or services do
for users and customers. The resource base
concerns the assets and inputs necessary for
creating the offering, while the value chain
regards the structure of the company and its
value creation process. The resource base is
related to the assets and inputs that are prereq-
uisites for making the company’s products.
Thus it is a prerequisite for value creation. In
production companies inputs are normally
raw materials or components. In Coloplast’s
case, this would be plastic and other mate-
rials. But assets and inputs are more than
merely materials. First of all, being a capi-
tal intensive production company, financial
assets become of the utmost importance. For
example, capital is a necessity for increasing
production capacity. An important resource
base is also technology. In Coloplast’s case,
it is the so-called adhesive-technology that
is the central aspect. This technology was
emphasized as the main synergy connect-
ing Coloplast’s various business areas,
although some analysts declared it too low-
technological to be a distinct competitive
advantage for the company.
Also among the core resources in Colo-
plast are the employees. Respondents argued
for the importance in not only having the
right employees, but moreover having sat-
isfied employees. Finally, knowledge about
the customer and the customer’s needs are
a central resource for Coloplast’s value
creation.
The value chain perspective was also partly
illustrated above in the analysts’ understand-
ing of strategy and the business model. When
the analysts were asked about their views of
Coloplast’s strategy, a major part of their
reasoning was based on different elements of
the business model, also elements pertaining
to the value chain. This, of course, should be
viewed in the light of the fact that Coloplast
in essence is a traditional production com-
pany and thus is largely structured accord-
ing to the value chain ideas. The value chain
characteristic is mobilized in connection
with production and distribution features.
With respect to production characteristics
regarding the value chain,
Coloplast has gone from having eve-
rything in-house to develop their pro-
duction strategy by first outsourcing
production to contractors, e.g. Mærsk
Medical, and second step in this devel-
opment story is to move own produc-
tion from Denmark overseas.
 Understanding the Health Care Business Model
Distribution features concern mainly
their forward-integration strategy through,
for example, their distribution affiliates
HSC and Sterling, but also their progres-
sion into the home care segment is per-
ceived as a successful operation by several
of the respondents. The only worries aired
in this connection have been that the operat-
ing margins in this section of the business
are significantly lower than the other more
lucrative areas. It seems that Coloplast must
evaluate the costs and benefits of attaining
a lower average return on invested capital
against maintaining closer relationships with
the markets and customers.
Finally, within this category, the business
model is associated with the value proposi-
tion of the company, i.e., the use value of
the products or services delivered. In this
sense the business model illustrates how the
company goes about delivering its market
offering, in other words, depicting the value
creation process. Essentially, Coloplast is a
production company, mass producing stand-
ard single use medical devices. But, Colo-
plast differentiates itself from being ‘merely’
a mass production company by basing its
operations on an alternative set of values.
One analyst summed up the link between
Coloplast’s value proposition and business
model in the following manner:
Coloplast puts the patient first, and does
not consider bulk production. Coloplast
asks themselves how they are able to
improve the quality of life for patients
and the users of our products and that
is why they invest so much money in
improving products, always being first
to market with improved versions of
products that are sellable at marginally
higher prices, and all this has turned
19
out to be a rather lucrative strategy for
Coloplast.
Thus, through the improving the quality of
life proposition, Coloplast’s business model
is product-innovation and customer-needs
oriented rather than production focused.
Relationships Among Elements
As opposed to the previous category of
characteristics, relationships among ele-
ments are more concerned with an action
perspective of the business model, i.e., what
the processes are, what is done, etc. The
three characteristics pertaining to this cat-
egory are:
1. Value drivers;
2. Value creation processes; and
3. Causal links between different activities
and elements of the business model.
Value drivers are in a sense key success
factors with respect to the company’s future
performance both competition-wise and
financially. When asked to describe the value
drivers of the company, most of the analysts
apply the terminology “growth drivers.” This
reveals the analysts’ focus on their valua-
tion models, in which the growth rate of the
company plays a central role. Although not
mentioned explicitly, there seemed to be a
consensus that a growth rate of 10 percent
a year was vital in relation to the valuation
of the company. The reason behind this very
specific number may be because the Boston
Consulting Group matrix, which is widely
applied in most business schools worldwide,
differentiates between high- and low-growth
companies at precisely this level.
There does not exist a final definition of
what a value driver is and what a growth
20 JOURNAL OF HEALTH CARE FINANCE/Winter 2010

driver is. The analysts used them inter-
changeably along with a third term, trigger
points. A slight difference between the two
terms could be that growth drivers often
are connected to these share-triggers, while
value drivers would be considered to be
more long term.
Along the line of argumentation that
trigger points and value drivers are not the
same, one analyst stated that “everything
revolves around value drivers. What you
could say is that some information differs
from value drivers with respect to being
what we call trigger points.” Furthermore
the analyst elaborated that, “value drivers
typically have duration of one to two years;
whereas, when you talk of trigger points,
then you are talking more about the kind of
news flow that moves the share price.” Our
empirical evidence also leads us to suggest
that a discontinuity in a value driver consti-
tutes a trigger point.
The value drivers emphasized by the ana-
lysts included the already elaborated aspect
of innovation, marketing and distribution,
and a business model based on excellence.
In addition, penetration of the US market
was among the most debated themes in the
interviews. In connection with Coloplast’s
recently released objectives for the next five
years, the issue of establishing itself on the
US market was given a key role. Finally, and
quite surprisingly, only two analysts men-
tioned demography as a value driver. The
fact that the fraction of older people will
increase significantly in the next 20 years is
a considerable growth driver of the market in
which Coloplast operates.
Surprisingly, value creation and value
creation processes as such are not mentioned

Figure 2. The Health Care Revenue Model

Payers $ Purchasers
Distributors • Insurance Companies Contracts • Employer
(Sterling) • Managed Care with • Medicare/Medicaid

Contracts
with
$

Providers Products
GPO • Hospitals & Services
• Doctors
$ • IHNs • Payments
Contracts • Nursing Homes • Copayments
with • Home Health $

Contracts
Products
Manufacturers with
& Services Products
(Coloplast) $
& Services
Patient
Products Distributors
(Sterling)
 Understanding the Health Care Business Model
in connection with the business model. From
the analysts’ perspectives, value creation is
only thought of in terms of attaining reve-
nues and thereby boosting profits and other
shareholder value measures. An important
insight from this study is, therefore, that the
financial analysts have grave difficulties in
distinguishing between the health care com-
panies’ business model and the model by
which the payment of revenues are allocated
between end users and reimbursing organi-
zations. These revenue streams are illus-
trated in greater detail in Figure 2, where it
is evident that the revenue streams indeed
are complex.
The final characteristic in this category,
causality, concerns the identification and
significance of links between activities,
resources, processes, and other value driv-
ers. Although Coloplast, according to one
analyst, operates in a sector that is not espe-
cially homogenous, causality between Colo-
plast’s product segments is attained through
its core adhesive technology: “Coloplast is
a much diversified company seen from a
product portfolio perspective. Despite this,
there is a connection between the divisions.
There are some technological connections,
i.e., the adhesive technology.” However,
other respondents disagree with this state-
ment. One opponent comments that, “with
regard to the general structure of the com-
pany, some of the divisions are total misfits.
I cannot see any synergies in those divisions
at all.”
As the grand finale, causality is the key to
the success of Coloplast’s business model.
First of all, there is an inevitable link between
Coloplast’s vision and values and the cus-
tomer segment it serves. This is the link
between improving quality of life and a busi-
ness model based on excellence. Excellence
21
was also the key causal relationship identi-
fied among market relationships, product
innovation, and production. This causal rela-
tionship among this tripartite is the key to
understanding Coloplast’s business model;
whereas, the link between vision, values,
industry segment, and the former tripartite
functions as a test of the appropriateness of
these causalities, precisely like the narra-
tive test of the business model that Magretta
suggests.72
Conclusion
The initial literature review identified a
series of focal-points concerning the content
of a general definition of business models.
Here, three overall business model themes,
namely:
1. The overall criteria that determine
long-term performance;
2. The point(s) of departure for value cre-
ation; and
3. The key interconnections that drive the
value generation of the company, were
identified.
Hence, in the following empirical sec-
tions, the financial analysts’ perceptions of
a health care company’s business model was
analyzed in accordance with these themes.
Having taken our point of departure in
how analysts understand strategy and which
elements they perceive as constituting the
business model of the health care company,
we were able to examine whether the char-
acteristics suggested in the literature review
were reflected empirically. By studying the
financial analysts’ perceptions of the health
care company’s business model, its struc-
ture, competitive strengths, and strategy,
22 JOURNAL OF HEALTH CARE FINANCE/Winter 2010
we are able to point out a number of criti-
cal success factors for communicating busi-
ness models and other forward-looking
statements.
First, the analysis demonstrated that
‘excellence’ was the key notion of a number
of the characteristics that were identified for
the business model of Coloplast. The busi-
ness model was seen to revolve around a
link between improving quality of life and
a competitive strategy based on excellence.
Excellence was also the key causal relation-
ship identified among market relationships,
product innovation, and production. The
causal relationships among this tripartite is
identified as the key to understanding Colo-
plast’s business model.
This study indicates that the financial
analysts’ understanding incorporated a wide
array of elements of the business model. For
example, the analysts described the method
of doing business: focusing on the whole
enterprise system and the company’s archi-
tecture for generating value as well empha-
sizing roles and relationships, describing
the uniqueness of the value generating
infrastructure, links, processes, and causal
relationships.
The analysts’ understanding of Colo-
plast’s business model was strongly related
to the company’s distribution strategy,
where there were marked differences across
product and market segments. This made
it difficult to describe Coloplast’s business
model very precisely, at least on an aggre-
gated level, suggesting that Coloplast oper-
ates with fragmented distribution (business)
models on the geographical and segment
levels. Also, it was by many respondents
stated that Coloplast’s competitive advan-
tage lies in its adhesive technology. Rather
than being product-development oriented,
Coloplast’s business model was focused
around a marketing relationship and excel-
lence perspective.
If the business model should be useful in
the communication of the company’s strat-
egy, it should be able to simultaneously
express the uniqueness of the company’s
strategy and the market it operates in and
at a general level facilitate a comparison
between the company and its competitors.
In the analysis it was indicated that the busi-
ness model constitutes an explicit link to
understanding the company’s uniqueness,
competitive advantage, and strategy—in a
sense, being a link to understanding the key
causal relationships that make up a busi-
nesses value creation process. Thus, if man-
agement is able to convey its understanding
of the company’s value creation logic in a
way that corresponds to that of external
stakeholders, communication would be
eased significantly.
While the financial analysts studied in this
article all had direct access to the company’s
management team, private investors do not
have access to the same sources and amounts
of information. Therefore, disclosing more
information of the same type as used by the
financial analysts via reporting media, e.g.,
in relation to the business model, would be
a significant improvement for the private
investors, despite the fact that the analysts
may not indicate that they in fact need such
types of information.
The latter is due to the fact, as stated ear-
lier in this article, that financial analysts pri-
marily get the more complex types of infor-
mation directly from the company and not
through voluntary reporting. Eccles et al.73
have argued for better disclosure from this
point of view, but still the investors would
be left with little clue about how indicators
 Understanding the Health Care Business Model
on, for example, intellectual capital should
be interpreted.
Sometimes companies report in their
annual reports only key performance indica-
tors or similar information without disclos-
ing them within the context of the business
model that explains their interconnected-
ness and why it is precisely this bundle of
indicators that is relevant for understanding
this particular companies’ strategy and
value creation. If this is the case, the inter-
pretation must be done by the readers of
the report. However, at the present there
exists only limited research-based insight
into how this reading and interpretation is
conducted.
From an accounting point of view,
improved disclosure is more or less about
determining the types of information that
most significantly explains market value, in
order that these numbers can be disclosed
and fed into the decision-making process,
maybe even capitalized, but at least used for
benchmarking purposes. It is, however, ques-
tionable whether the financial market, i.e.,
investors and analysts, would regard capi-
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